FinMin in-principle backs OilMin plan on RIL gas price

Finance Ministry has in-principle agreed to a proposal to allow Reliance Industries to raise gas prices from April provided it gives a bank guarantee to cover for liability in case gas hoarding charges are proved.

PTI| Updated: Dec 11, 2013, 17:56 PM IST

New Delhi: Finance Ministry has in-principle agreed to a proposal to allow Reliance Industries to raise gas prices from April provided it gives a bank guarantee to cover for liability in case gas hoarding charges are proved.

The bank guarantee, which will be equivalent to the incremental revenue that RIL will get from the new gas price, will be encashed if it is proved that the company hoarded gas or deliberately suppressed production at the main Dhirubhai-1 and 3 (D1&D3) fields in the eastern offshore KG-D6 block.

"We have received comments from the Finance Ministry (on the draft Cabinet note floated on the KG-D6 gas pricing issue)," Oil Secretary Vivek Rae told reporters on sidelines of the 12th Petro India conference here.

"The comments were received 2-3 days back. I don't know what they have said as I have not seen them yet," he said.

Another official said the Finance Ministry "in-principle" agreed to the proposal but has sought to know if government position on reasons for fall in gas output at KG-D6 will be diluted.

The arbitration, where RIL is countering government stand that non-drilling of committed wells led to 80 percent fall in output by saying citing geological complexities and lower than anticipated reserves, may linger for an indefinite period, the finance ministry feels.

It is of the view that the bank guarantee in that case may run into about USD 9 billion which needs to be monitored. It also wanted to know the proposed course of action in case RIL does not comply with bank guarantees, he said.

The government in June approved pricing of all domestically produced natural gas, both for private and public sector firms, at an average of global gas hub rates and imported LNG price. The rate in April when the new pricing will be implemented will be USD 8.2-8.4 per million British thermal unit as against current USD 4.2.

However, the Finance Ministry had felt that since gas output at KG-D6 fields fell because of RIL deliberately not drilling the committed number of wells, the new price shall not apply for gas from D1&D3 fields till the shortfall of quantity of past three years is made good or till pending arbitration on the issue is decided.

Earlier, Planning Commission and the Law Ministry have both backed the bank guarantee as the possible resolution to the issue that had threatened to cast a shadow on the forthcoming round of auction of oil and gas blocks under New Exploration Licensing Policy (NELP).

The bank guarantee will cover the difference between the current gas price of USD 4.2 and the new rate of USD 8.2-8.4, which will come into effect from April 1.

At the instance of the Finance Ministry, the Oil Ministry had in a August note to the Cabinet proposed that RIL be forced to sell gas from the D1&D3 fields at the current rate until it is proved that the 80 percent fall in output at the fields was due to natural reasons or it makes up for the shortfall in production since 2010-11.

This would have meant pronouncing RIL guilty even before trial, the official said.

The veracity of allegations that RIL hoarded gas in anticipation of a price hike can be established by arbitration or a third-party expert, a process that can take 1-2 years.

The official said: "If we forced RIL to sell gas at USD 4.2 and at a later date it was established that output had fallen due to geological reasons and there was no hoarding, then who would make good the difference between USD 4.2 and the price they are actually eligible from April 1, 2014?"

The official added that the government cannot ask consumers to pay a higher price for gas consumed in the period taken to decide on the hoarding charge.

The government, he said, could have charged customers the higher price from April 1 and paid RIL the lower rate while keeping the difference in an escrow account until the issue was sorted out. However, the production sharing contract does not provide for escrow accounts.

The bank guarantee will be calculated quarterly as the gas price will change every three months, based on average international hub prices and the rate at which LNG (liquefied natural gas) is imported to India.

The bank guarantee will be about USD 90 million in the first quarter of fiscal 2014-15, considering an anticipated output of less than 8 million metric standard cubic metres per day (mmscmd) from D1&D3, after netting the excess royalty that RIL will pay at the higher price.

A lower gas price would have been the second penalty imposed by the Oil Ministry for RIL falling short of stated production targets. It had already levied a USD 1.8 billion penalty for the output drop, an issue that is in arbitration.

Gas production from the D1&D3 fields fell to 8.7 mmscmd this month from a peak of 54 mmscmd in March 2010.

Production has been below target since the latter half of fiscal 2010-11 and should currently have been 80 mmscmd, as per the 2006 investment plan.

Output from the MA oil and gas field in the KG-D6 block, too, has fallen over 62 percent.

However, the ministry and the Directorate General of Hydrocarbons, the oil regulator, have agreed with RIL's reasoning that geological complexity was responsible for the drop and approved the higher price for the MA field's output.